ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Managerial Ownership and Implied Cost of Equity Capital －Evidence from Korea－

  • Chun Hongmin Chungbuk National University

Asian Tax Journal Vol. 15 No. 1 (2014), pp. 9-29

Abstract

This paper examines the potential effect of managerial ownership and cost of equity capitalusing Korean firms. Prior literatures suggest that there can be mixed results toward managerialownership and firm value(Morck et al. 1988；Jensen and Meckling 1976；Kim 2002). So therecan be two conflicting hypotheses toward managerial ownership and firm value(IncentiveAlignment hypotheses and Management Entrenchment hypotheses). Therefore recent studiesdecompose firm value into free cash flow and cost of equity capital. Then Huang et al.(2009)suggest that using U.S. firms, managerial ownership is negatively associated with cost of equitycapital. However Korea and U.S. has different corporate governance system which can be differentdegree of shareholder rights and ownership structure. Especially Korea has more higher ratio ofowner manager then U.S., this managerial characteristic can affect on different empirical resulttoward this issue. So this paper tries to investigate managerial ownership and cost of equitycapital using Korean firms. Also this issue can be open empirical studies in Korea. Using 2002 to 2008 Korean firms, managerial ownership is positively(＋) associated with cost ofequity capital in Korea. Also this paper divide sample into three part according to managerialownership, under 5%, 5% above 25% under and above 25%. Then in 5% above 25% under andabove 25%, managerial ownership is positively associated with cost of equity capital in Korea. This empirical result shows that investors recognize higher managerial ownership as managemententrenchment then investors require risk premium toward managerial ownership. This paper's contribution is as follows. This paper can be the first empirical study to examinemanagerial ownership and cost of equity capital in Korea. I believe that this empirical evidencemay shed some lights on our understanding of the potential effect of managerial ownership onvarious aspects of firms.

Keywords

  • managerial ownership
  • cost of equity capital

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